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Unformatted text preview: Chapter 3 Preferences and Utility Solutions to Review Questions 1. A basket is a collection of goods and services that an individual might consume. 2. By requiring preferences to be complete, economists are ensuring that consumers will not respond indecisively when asked to compare two baskets. A consumer will always be able to state that either A is preferred B, B is preferred to A, or that she is indifferent between A and B. 3. Unfortunately, it is impossible to say definitively whether D, H, or J is the least preferred basket. Since more is better, baskets to the northeast are more preferred and baskets to the southwest are less preferred. In this case, H has more clothing but less food than D, while J has more food but less clothing than D. Without more information regarding how the consumer feels about clothing relative to food, we cannot state which of these baskets is the least preferred. 4. If a consumer states that A is preferred to B and that B is preferred to C, but then states that C is preferred to A, she will be violating the assumption of transitivity. The third statement is inconsistent with the first two. 5. If more is better, then the marginal utility of a good must be positive. That is, total utility must increase if the consumer consumes more of the good. 6. An ordinal ranking simply orders the baskets, but does not give any indication as to how much better one basket is when compared with another; only that one is better. A cardinal ranking not only orders the baskets, but also provides information regarding the intensity of the preferences. For example, a cardinal ranking might indicate that one basket is twice as good as another basket. Page 3 - 1 7. Utility Hamburgers Slope of this line measures marginal utility at this level of consumption, H H Total Utility Marginal utility would be measured as the slope of a line tangent to the total utility curve in the graph above. 8. The two cannot be plotted on the same graph because utility and marginal utility are not measured in the same dimensions. Total utility has the dimension U , while marginal utility has the dimension of utility per unit, or y U / where y is the number of units purchased. 9. a) Yes, we can determine the MRS as f h f h MU MU MRS = , b) No, when we know the MRS, all we know is the ratio of the marginal utilities. We cannot undo that ratio to determine the individual marginal utilities. For example, if we know that MRS h,f = 5, it could be the case that MU h = 5 and MU f = 1, but it could equivalently be the case that MU h = 10 and MU f = 2. Clearly, there are countless combinations of MU h and MU f that could lead to some particular value of MRS h,f , and we have no way of inferring which is the right one....
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- Fall '07